A PTO that Can Do Its Job

It's hard to overstate the patent system's importance to competition. Patent rights give an incentive to innovate; they create jobs; and they enable their owners to obtain financing. Patent licensing allows firms to transfer technology to the users best positioned to use it in particular fields. And in some industries, for better or worse, patents serve a defensive purpose, too--they give firms a seat at the table, allowing them to use cross-licenses in order to participate in a particular business. Strong, quality patents promote competition.

Bad patents, though, can do the opposite. And many observers worry that U.S. patents convey too much power to claimed inventions that don't even deserve protection. They see patents covering for illusory innovations over the prior art, with claims far broader than the actual invention, on naturally-occurring substances or phenomena, or for business methods that (at least in retrospect) seem intuitively obvious. The upshot, these critics say, is powerful exclusive rights over a broad spectrum of high-technology industries, hampering competition from new innovators. Others, in contrast, see the patent system as slow and unresponsive to inventors, with overwhelmed patent examiners issuing patents long after the underlying inventions have been revealed to the world.

Patent reform legislation has been pending now for several Congresses, and it's hard to be confident as we head towards campaign season that it will get up for a vote in this one. Meanwhile, you can bet that the Federal Trade Commission is thinking about how to rein in owners of potentially powerful patents--watch out for a Section 5 case based on a sale of a powerful patent to a "non-practicing entity," more commonly called a patent troll, on the theory that the troll's more likely than the seller to wield the patent aggressively. You can imagine from an earlier column or two what I think of that idea.

But most core concerns about the U.S. patent system are traceable to the fact that the U.S. Patent and Trademark Office (USPTO) doesn't have the money it needs to do its job right. USPTO generates a terrific amount of revenue from patent application fees, but for nearly two decades now, Congress has used some of those fees to subsidize other projects--from 1992 to 2004, more than $900 million in fees were diverted to non-PTO operations. The diversions stopped for a few years, but have resumed, while the demands on USPTO resources have increased. Consider the challenges USPTO is facing:

As technology has progressed, patent applications inevitably have become lengthier and more complex.

Patent examiners are expensive to train and, at current government salaries, tough to retain, so that by the time a young examiner hits his or her stride, she can do far better in the private sector. In fact, the USPTO's average examiner has been there only three years.

Examiner compensation and evaluation has discouraged thorough review of complex or questionable applications.

The IT system that examiners depend on to review applications and survey the prior art is badly outmoded.

Of the 1.2 million patent applications pending at the end of fiscal 2009, more than 700,000 were awaiting their first office action (the examiner's first substantive response to the application); over 300,000 were not even assigned to an examiner yet.

The average time from application filing to first office action is more than two years, and for patents relating to software development, the average is almost four years. Total average pendency is nearly three years, and more than four and a half for software development applications. (Applications become public 18 months after filing, but until a patent is granted, the inventor can do little to stop others from using its invention.)

So plenty of factors that could produce bad patents are in place: a huge backlog; an inadequate number of examiners--many inexperienced, all undercompensated; disincentives to conduct effective reviews; and badly outdated IT resources. No amount of substantive patent law reform would compensate for this. And whether you think that U.S. patents are too strong or too weak, that patents take too long to be issued or that many of them shouldn't be issued at all, USPTO's problems are bound to be contributing to your concerns.

So it should make everyone happy that the administration recently asked Congress to return to USPTO $129 million in user fees that had been diverted to the Census Bureau. And the pending patent reform bills would prohibit any further fee diversions. But that's only a start. Former Federal Circuit Chief Judge Paul Michel, who recently retired from the bench altogether to be able to speak freely about important issues like this one, estimates that a billion-dollar investment is necessary to counter the harm caused by the years of diverted fees. He proposes that the money be used to expand the examiner corps with more experienced professionals, to restructure their compensation system to retain examiners and reward excellence, to modernize the USPTO IT system, and to allow USPTO to open regional offices in other cities with significant concentrations of technology professionals.

Lots of us are still hoping that the Senate's comprehensive patent reform package will become law this time around. There's concern, though, that lingering opposition will kill the bill yet again. As we head towards the fall campaign, then, USPTO's supporters may have to decide whether they'd rather have the patent-fee language than nothing. House Judiciary Chairman John Conyers took a step in that direction in May, introducing a bill that focused exclusively on the fee issue. His bill is a distant second best to more comprehensive reform, but at least it would start USPTO back onto the path to recovery.

Whatever people may think about first-to-file or patent opposition proceedings, everybody's got an interest in seeing this kind of patent reform: When our PTO issues high-quality patents that clearly cover genuine technological innovations, everyone is better off in the long run. Innovators are rewarded, companies can attract investment, consumers enjoy the benefits of technological advances, and competitors can clearly identify where they are free to operate and where they need to either take a license or invent around. And that makes technological competition work better, which is why you're reading this in an antitrust law column.